It has been another week of relentless newsflow, with central bank meetings and trade deals on the agenda. We’ve seen rate cuts in the UK, the Federal Reserve in ‘wait and see’ mode and have a little more insight to the longer-term structure of US tariffs after the ‘deal’ with the UK was announced yesterday
Let’s start with yesterday’s announcement by President Trump and Prime Minister Starmer of a ‘trade deal’ between the US and the UK. As a result, tariffs on UK manufactured cars imported into the US will be reduced from 27.5% to 10%, subject to a quota of 100,000 (which covers the majority of annual exports), and removed completely on UK steel and Rolls Royce aero engines. The UK will offer US farmers improved access without lowering food standards and reduce tariffs on US ethanol along with an unnamed airline buying Boeing planes to the value of $10 billion. The UK digital services tax remains in place. The end result is a higher level of tariffs on the UK than we saw before ‘Liberation Day’ at the start of last month, but further negotiations will follow, including on pharmaceutical goods.
Trade deals normally lower barriers and costs; this agreement is simply securing a ‘less bad’ outcome from a UK perspective. There was no movement on the 10% baseline tariff, which signals this is more permanent feature, and not just for the UK. The US effective tariff rate on UK imports will now be around 11% after the agreement, compared to around 13% before and 1% last year. President Trump said overall levies on countries with large trade surpluses with the US could remain well over 10%; “some will be much higher… the template of 10 [per cent] is probably the lowest. Ultimately this is not a trade deal as such, this is a narrow agreement to cut or limit the scope of tariffs imposed by the US last month. A detailed trade deal would take significantly more time and detailed negotiation. It would also need the approval of Congress. But it sets a template for other countries and also serves as a reminder that with baseline and other tariffs set to remain in place, the overall US tariff regime is still set to be higher than anything we’ve seen since the 1930s.
The UK also agreed a trade deal with India this week. The deal makes concessions to India on access to UK employment markets in return for tariff cuts on UK exports of whisky and cars. Whisky and gin tariffs will drop from 150% to 75% immediately and down to 40% over a decade. The deal is estimated (by the UK government) to boost the UK economy by…. wait for it…. 0.1% by 2040!
What is positive for the UK is that nothing in the US deal announced this week threatens ongoing talks with the EU on a ‘reset’ in the trading relationship. While the US is the UK’s biggest individual trading partner, importing $220 billion of UK goods last year, the EU market is worth almost double that figure. Talks between the UK and EU on defence, security and wider economic discussions are ongoing, with a summit in London planned for 19 May. Any unwinding of the trade barriers created by Brexit could make a notable impact on GDP.
Yesterday saw the Bank of England cut interest rates by 25 basis points to 4.25% in a three-way split decision. Five Monetary Policy Committee (MPC) members supported the cut, two voted for a larger 50 basis point cut and two voted to keep rates on hold. The divisions within the MPC reduced market expectations for cuts over the course of the year, with two further cuts still expected, but a further cut now priced at 30% probability rather than 80% before the meeting. The Bank still appears to be concerned around inflation, which they expect to peak at 3.5% in the third quarter, before returning to the 2% target in 2027. They expect the UK economy to grow by 1% in 2025 and 1.25% in 2026, based on the assumption that US reciprocal tariffs will remain suspended but higher barriers between the US and China persist. Trade tensions are expected to reduce UK GDP by 0.3% by 2028. Governor Andrew Bailey said there must be a “gradual and careful” approach and “interest rates are not on autopilot – they cannot be… instead the MPC must continue to respond carefully to evolving economic circumstances”. Bailey also told the BBC that the following the trade talks with the US the UK needs to “rebuild” the trading relationship with the EU and do “everything we can” to improve long term trade. Bailey said a closer relationship with the EU “would be beneficial because the EU is the UK’s largest trading partner”. The talks between the UK and EU on a reset of the trade and security relationship continue ahead of a summit later this month. Any such deal would likely have a far more positive impact on GDP than the agreements reached with India and the US this week.
In the US, the Federal Reserve (Fed) meeting, as expected, saw no change to policy rates with interest rates held at 4.25-4.5%. The Fed’s statement warns that “uncertainty over the economic outlook has increased further” and the “risks of higher unemployment and higher inflation have risen”. Rates have been on hold since December, and Fed officials have signalled they will remain on pause as they digest the impact of the tariffs imposed by President Trump. In the press conference, Fed Chair Jay Powell said while the economy “remains healthy”, the tariffs put the central bank in a position where both sides of their inflation and employment mandate are challenged. Powell said the central bank was in “no hurry” to change policy and “the right thing to do is await further clarity”. Despite pressure from President Trump, it appears likely the Fed will remain on hold until they have more evidence of the impact of the tariff policies over the coming months. Markets are still expecting three cuts during 2025 but if any rate cuts happen it will likely be much later in the year.
The focus now moves swiftly on to who else can make a trade ‘deal’ with the US. Talks are said to be taking place with Canada, Mexico, Vietnam, Japan and India, along with the EU. Trade talks with China are also set to begin tomorrow, with Treasury Secretary Scott Bessent and US Trade Representative Jamieson Green to meet their Chinese counterparts in Geneva this weekend. China said their top economic official, Vice President He Lifeng, would lead their delegation. Bessent said they have a “shared interest in talking” given the high level of tariffs “isn’t sustainable”. Bessent noted the discussions would be an effort to lower tensions initially rather than to negotiate a broader trade deal, saying “we’ve got to de-escalate before we can move forward.” The meeting will be the first real efforts to de-escalate the trade war that has seen the US impose 145% tariffs on imports from China, with China retaliating with a 125% tariff. So, the standoff is over – President Trump had previously wanted to talk directly to President Xi but China did not want to start negotiations at leader level. The Chinese Commerce Ministry said China agreed to talks after US officials hinted at tariff relief and communicated their desire to start talks. It is unclear how much progress will be made this weekend, but the outcome of the meeting, and what follows, will hopefully give a clearer indication of the scope of the US’s major trading partners to talk down the current and proposed levels of tariffs, with any significant reduction on the China tariff potentially restoring a degree of normality to the relationship between the two global economic superpowers.
Source: Columbia Threadneedle Investments as at 09 May 2025
